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Economic Analysis - No More Easing Over The Course Of 2017 - SEPT 2017

South East Asia Vol 1 July 2017 / Vietnam / Economy

BMI View: Following SBV's surprise move to cutits benchmark refinancing rateby 25bps to 6.25% in July, we expect the central bank to remain on hold for the rest of the year. We forecast inflation is to pick up to 5.2% by year-end on the back of sustained high credit growth, the government's still-wide fiscal deficit, and higher oil prices, while a growth recovery is likely to reduce pressure for SBV ease again.

The State Bank of Vietnam (SBV) lowered its benchmark annual refinancing rate and rediscount rate by 25bps to 6.25% and 4.25%, respectively, in a surprise announcement on July 10 (Decision No.1424/QD-NHNN dated July 7). The move came amid a lacklustre real GDP growth performance of 5.7% y-o-y in H117 as compared with the government's target of 6.7%, and as inflation trended lower since the start of the year. Although the lowering of interest rates is likely to be supportive of credit and economic growth, we reiterate that the central bank's overly easy monetary policy and high credit growth target is unsustainable over the medium-term and poses downside risks to macroeconomic stability ( see'SBV To Stay Neutral Amid Growth-Inflation Dilemma', April 10).

Over the remainder of the year, we do not expect further rate cuts given that interest rates are rising in developed markets (which is likely to exert downside pressure on the VND) and core inflation is likely to head higher. Additionally, an uptick in real GDP growth will likely reduce pressure on the central bank to ease monetary policy further to support growth.

Inflation To Head Higher In H217

Vietnam - Headline Inflation, %

SBV, BMI

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